Yi Xianrong

 

Judging from the figures released recently by the National Bureau of Statistics, the Chinese economy is faring pretty well, enjoying high growth and low inflation.

 

The rate of fixed-asset investment, in particular, dropped to 24 percent at the end of last year from 30 percent in the first quarter. This lets economists heave a sigh of relief.

 

However, the effects of the current round of macroeconomic readjustments could be short-lived, since the effects were achieved largely by heavy government-command measures.

 

So, investment in fixed assets could shoot up again once the general economic climate changes. In this scenario, another investment craze could be triggered.

 

A number of factors help explain the possible rebound of investment in fixed assets.

 

First, the economic growth in recent years has largely been powered by the rapid growth of investment in real estate that is part of the accelerating urbanization.

 

Although the macroeconomic readjustment and regulation implemented in the real estate sector have somewhat slowed the runaway expansion of that market, no substantial effects have been seen. This is because housing prices keep rising and the real estate sector serves to boost the short-term growth of the gross domestic product (GDP).

 

This is also because real estate involves very complex relations between different vested interests.

 

All this is compounded by the fact that many of the government's readjustment measures are largely of the command type.

 

In my visits to a number of medium-sized cities over the last couple of years, I found that their real estate markets had expanded enormously since 2005, when macroeconomic readjustment in the real estate sector was launched.

 

Real estate developers have taken advantage of the differences in the macroeconomic readjustment policy applicable in different localities.

 

The real estate investment in some cities in western and central China is increasing at the rate of 30 percent.

 

In mega-cities such as Beijing and Shanghai, the proportion of real estate investment in the total fixed-assets investment and its rate of increase were not reduced. Taking into consideration the fact that the real estate industry is connected to more than 50 industries and sectors, a new round of investment fever could come any moment if no effective control is put on the growth of real estate investment.

 

Second, the surplus of capital within the country's banking system also poses a barrier to macroeconomic readjustment.

 

This kind of capital surplus directly stems from the sharp increase in capital resulting from the major banks' stock market listings one after another.

 

Between October 27, 2005, and October 27, 2006, China Construction Bank, Bank of China and the Industrial and Commercial Bank of China raised nearly 360 billion yuan (US$45 billion) shortly after they were listed on the Chinese mainland and Hong Kong stock markets.

 

In addition, the three banks already had US$60 billion in registered capital before they were listed.

 

There exists an enormous pool of capital that can turn into loans. As a result, banks are expanding the scale of loans.

 

The banks hold an enormous amount of capital, which needs an outlet. And they can reap easy profits by simply lending out the capital.

 

In addition, expansion of loans is not only the primary means to make profits for domestic commercial banks. It is a good way to steer clear of short-term risks as well.

 

For these reasons, domestic banks' increase in loans keeps snowballing.

 

Encouraged by the three banks' successful initial public offerings, smaller domestic banks are scrambling to be listed. This, in turn, could lead to more bank loans.

 

Although the People's Bank of China, the central bank, has taken measures to bring the increase in loans under control, the impulse for boosting loans goes largely unchecked. This is an important factor that could trigger the rebound of fixed-asset investment at any moment.

 

In addition, the domestic stock market began a long-awaited boom last year. As a result, large corporations rushed into the exchanges to raise money. They succeeded in raising 240 billion yuan (US$80 billion) before the end of 2006.

 

The big money could help set in motion a new round of investment fever in China.

 

There are also other factors such as strong expectation that the renminbi will appreciate, strong volatility in the monetary market and the banks' low-interest rates. These factors contribute to the possibility of even more investments.

 

The crux of the solution lies in the government's adopting effective macroeconomic policies to bring down the expectations of enterprises and individuals and, in turn, regulate their economic conduct so that sharp fluctuations in our economic life can be minimized.

 

The author is a researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences

 

(China Daily February 14, 2007)